Wednesday, February 29, 2012

Looking at the Primary results in Arizona it’s too bad Mr. Santorum did not beat 99 to 1 odds and win the state, but then nobody really beats 99 to 1 odds.Of course it didn’t help that Mr. Santorum spent the last week of the Michigan/Arizona campaign building his lack of electability.One wonders what the results would have been in these two states had Mr. Santorum been prepared for the lone debate, and had decided not to make a bunch of idiotic statements. But then, he would not have been Rick Santorum, would he.

In Michigan it probably would not have made any difference.Mitt Romney did what he had to do, which was to generate turnout in his strong areas.Actually, it looks like Mr. Santorum may have generated the turnout for Mr. Romney by disgusting voters with his recent comments. No matter, Republican voters turned out for Mr. Romney.

The Detroit area came out heavily for Mr. Romney, and his vote total in Michigan was more in 2012 then it was in 2008.This dashed the media’s hope for a really close election, and while Mr. Romney did not win by as great a percentage as he did in 2008, he will claim momentum going into next Tuesday’s Super Tuesday primaries.

This Forum has followed the forecasting models of the New York Times’s Nate Silver, whose Five Thirty Eight is the place to go for objective quantitative analysis.Before the weekend Mr. Silver had Mr. Romney up about 4 points, pretty close to the actual result.Over the weekend the polls showed a closing of the race, but turnout for Mr. Romney and the stupid remarks by Mr. Santorum made those polls incorrect.As this Forum stated, when a race is projected to be very close it is very easy for the polling and the projections to be wrong. Here are the comments that were made here three days ago.

This Forum has often lauded the analytical abilities of Five Thirty Eight’s premier political analyst Nate Silver, for the simple reason that he is the most accurate forecaster of election results.Mr. Silver uses quantitative models of polling and other data to forecast the percentage a candidate will get and the probability that the candidate will win.

Because the models used by Mr. Silver rely on data as it becomes available, they are not good predictors until just before an election.So now we have the best forecast available for the Republican primaries in Michigan and Arizona, a day before the election.The expectation is that Mr. Romney will win Michigan by about 4 points.

The Romney win was 3.2% points, 41.1% to 37.9% pretty close to what Mr. Silver's model was saying. Both candidates picked up votes from the collapse of the Paul and Gingrich vote (although Mr. Paul, like Mr. Santorum is claiming victory because they having a different defintion of winning then the rest of us.) Below the surface are some very important results that the major commenators will miss. Foremost of these is that Mr. Romney won amongst Catholic voters, and he won the anti-abortion vote. The point, Mr. Santorum's appeal on social issues is a loser in a state like Michigan. The contests in March will now determine if that is a permanent state, or if social issues can propel Mr. Santorum in other, more conservative states.

As far as projecting Super Tuesday, it will no be until the weekend for polls to be reliable.The voters will have to digest the results of the Michigan and Arizona primaries, and this will take a few days.So don’t pay any attention to what anybody says until Saturday at the earliest.Then look at Mr. Silver’s modeling results.That should tell you what to expect.

When Newt Gingrich announced that he was running forthe Republican nomination for President for 2012, a lot of us, ok, make that all of us, thought that he was not a serious candidate.The thinking was that Newt was basically using the political campaign to sell Newt, Inc. because that’s what Newt does for a living.And he does it very well.He makes a lot of money selling Newt.

This hypothesis was largely confirmed when Mr. Gingrich immediately went on a long vacation after announcing his candidacy, and his staff quiet en masse.In late 2011 Mr. Gingrich’s candidacy actually had the aura of being a real campaign, but this caused voters to actually consider Mr. Gingrich, and that immediately spelled the end of any serious consideration by any serious considerators.

So we are back to the original theory, that Mr. Gingrich is running to enhance the Gingrich brand, and maybe pick up some small change.Businessweek reports how he is leveraging his candidacy to promote a concept called “Lean Six Sigma”.Here is what Lean Six Sigma means.

Last year, Mike George, a former management consultant, began approaching Republican Presidential candidates about signing his pledge to eliminate the national deficit using Lean Six Sigma, a strategy he developed in the 1990s. Enrollees in Lean Six Sigma courses learn ways to cut waste in their companies and make their workers more effective, earning “green belt” certification for one to two weeks of training and “black belts” for four.

Mr. George has tried to sell his concept to Republican candidates, and finally formed a PAC to support Mr. Gingrich. So Mr. Gingrich has returned the favor.

So the 72-year-old Texas businessman decided to form a super-PAC and get behind one candidate: Gingrich. The candidate has name-dropped Lean Six Sigma in campaign appearances, media interviews, and Republican debates no fewer than 28 times since mid-2011, according to a Bloomberg News review of transcripts and news reports

Of course everyone denies there is any quid pro quo, but

More than anything, the relationship illustrates a new way for a wealthy donor to leverage an election as a public-relations tool for a product or message. It’s “kind of amazing,” says Craig Holman, a lobbyist with Public Citizen in Washington, a group that advocates for more regulation of political donations. “I could easily see it catching on: ‘You tout my book, and I’ll provide you with a portion of my proceeds.’”

The signs of failure of hedge fund manager Edward Lampert as CEO of Sears are everywhere.The Company is hemorrhaging cash and having to sell assets to build its cash levels back up to a safe level.

For the year, Sears reported a loss of $3.14 billion, a number that included $2.7 billion of charges, compared with a profit of $133 million for 2010. The fourth quarter had a $2.44 billion loss, compared with a profit of $382 million the previous year.

The Chairman of Sears, Mr. Lampert and his hedge fund own about 61% of the company.And since he has become chairman, Sears has not done all that well.

The company also reported an annual decline in revenue, its fifth in a row. Such trends are a stark reminder that Sears’s problems have deepened since it came under Mr. Lampert’s control.

Critics say that under Mr. Lampert the company has not spent enough to update its stores and that now, in the face of intense competition, Sears is in danger of permanently falling out of shoppers’ favor.

Pure speculation would say that when those hedge fund managers who have large egos (all of them do) try to actually operate a business they fail miserably.And that’s what seems to be happening with Mr. Lampert.The company has a great number of assets, and like every other entity, both personal and business ones, get into trouble they start selling those assets.

One of the asset sales appears to be in the bag. General Growth Properties, a mall operator, has agreed to buy 11 Sears properties, which will raise $270 million.

However, the other deal — which aims to raise as much as $500 million and is slated for later this year — is less straightforward. In effect, Sears aims to sell its smaller Hometown and Outlet stores to any interested Sears shareholders. The company said Mr. Lampert’s hedge funds expected to participate and exercise their rights in full.

But the danger is that Sears may be selling some of its best properties, which could mean even worse operating results in the future. On the conference call on Thursday, a Sears executive declined to say what proportion of its stores was profitable.

This story raises even more red flags, Sears is going to sell very profitable stores to Mr. Lampert’s hedge fund.Really, what possible conflict could exist there?But the really interesting part of all of this is the stock price, which has increased dramatically since the beginning of 2012.

Shares are up 6% at $65.41. The stock is up 106% in 2012, the top performer in the S&P 500. Netflix is the only other stock within the index that has had at least a 50% run-up this year.

What possible explanation could there be for that?Well it could be that investors are not all that bright.See, EBITDA is positive if you don’t list all of the expenses.

Sears said it had $277 million of adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda. But Ms. Ross Gilbert said that excluded $383 million of cash contributions to its pensions. Including that would put Ebitda deep in negative territory. And if Sears’s top line continues to decline, the loss could be even deeper this year.

“We believe the equity valuation is well out of line with comparable retailers,” he says, while reiterating an underperform rating and $20 price target.

Sears’ transformation and planned asset sales “buy time, they do not buy success,” Balter adds. “They are steps in the right direction but we believe that the hole that has been created will not be as easy to climb out off as investors believe.”

Balter says the stock remains “very expensive” based on traditional measures and would take more than a six-fold increase in EBITDA to come in line with its competitors.

“Investors need to separate liquidity concerns from valuation, with our near term focus being much more on valuation,” he says.

Good analysis there, and it is free!So what explains the huge rise in Sears stock?Well, a lot of Madoff investors have gotten some of their money back, and they have to invest it someplace, don’t they.

Tuesday, February 28, 2012

The final poll for the Michigan Primary has now been factored into the forecasting models that Nate Silver of the most accurate political Forum, Five Thirty Eight, produces, and the race at this point is too close to call.Here is the final quantitative analysis of that crucial primary.

The race is essentially a dead heat, with Mr. Romney at about 39% of the vote, Mr. Santorum at 38%.The probability of Mr. Romney winning is 55% over Mr. Santorum’s 45%, which says that Mr. Romney is still the slight betting favorite, but not by much.Do not be surprised though if the race is not close.Mathematical models like the ones Mr. Silver has developed are less accurate when the race is close, and the polling in Michigan does not have that high quality look, so the input data is not strong.The race could be that rare circumstance where polls and forecasters get it wrong.

The key is going to be turnout, and also whether or not enough Democrats, who can vote in the primary, go into the ballot booth and vote for Mr. Santorum out of a desire to scramble the race.There will be some rhetoric on this, but probably not enough Dems will vote to make a difference.If Mr. Romney loses though, expect this to be one of his excuses.

Turnout will also be the key factor in assessing the Michigan primary.If turnout is less than the 2008 race it will be an indication of the lack of interest in the Republican race by anyone other than diehard Republicans, and that in itself would be the major message from Michigan.

The other primary, Arizona, looks like a certain Romney victory.The models of Mr. Silver give Mr. Santorum only a 1% chance of winning.This motivates all of us to hope that Mr. Santorum does win Arizona, for everyone likes to see a 99 to 1 underdog pull it out.

A Candidate Exposes His Ignorance in the Opinion Pages of the Wall Street Journal – Where Ignorance Usually is Found

The Wall Street Journal editors are still not sold on Mitt Romney, even after he abandoned his own tax plan and replaced it with a tax plan specifically tailored for the Wall Street Journal.So now they have given space for Rick Santorum to spout his economic and tax views.This may well have an unintended effect for the Journal editors, because by allowing Mr. Santorum to discuss policy they do what many thought was impossible, they make Mr. Romney’s views look almost (but not quite) rational.

Mr. Santorum provides what he says would be his priorities for the first 100 days of office, should he be elected President of the United States.Here is a sampling with the appropriate derisive commentary.

sign an order on day one unleashing America's domestic energy production, allowing states to choose where they want to explore for oil and natural gas and to set their own regulations for hydrofracking

Uh, Mr. Santorum states already regulate hydrofracking.

All Obama administration regulations that have an economic burden over $100 million will be repealed

Ok, that should include all of them.

The corporate tax rate should be halved, to a flat rate of 17.5%. Corporations should be allowed to expense all business equipment and investment.

Wait, let’s see what he wants to do about the national debt which will of course be increased by this policy.

I'll propose spending cuts of $5 trillion over five years, including cuts for the remainder of fiscal year 2013. I'll propose budgets that spend less money each year than prior years, and I'll reduce the nondefense-related federal work force by at least 10%, without replacing them with private contractors

And once again a proposal to cut federal spending without identifying what programs will be cut.That’s allright, at $1 trillion a year that is just about all the non-defense discretionary spending. No education spending, no welfare spending, no spending on any government program. And he is going to fire a couple hundred thousand federal government workers, that should help the unemployment rate (get bigger).

I'll submit to Congress a budget that will balance within four years and call on Congress to pass a balanced-budget amendment to the Constitution which limits federal spending to 18% of GDP.

Well a $1 trillion in spending cuts would do, but all those other tax cuts will wipe out those savings, even if they could be done, which they cannot.

Revive housing. I'll submit plans to Congress to phase out within several years Fannie Mae and Freddie Mac's federal housing role, reform and make transparent the Federal Reserve, and allow families whose mortgages are "underwater" to deduct losses from the sale of their home in order to get a fresh start in difficult economic times.

Apparently Mr. Santorum doesn’t understand basic housing economics, and doesn’t realize the Fannie and Freddie are right now critical to reviving the housing industry.As for allowing families to deduct the losses on their homes when they owe more than they receive from the sale, exactly how does that work?See the banks won’t let them sell the houses because they are underwater, and so people either stay in them until the bank defaults or walk away from them and give them back to the bank.Being wealthy and having a million dollar income insulates Mr. Santorum from the realities of the housing world.

So there you have it, what millions of people thought was impossible.Rick Santorum makes Mitt Romney’s policy prescriptions look good, if only in comparison to the undiluted pure idiocy of what Mr. Santorum would do and why he would do it.

In Other News, Mitt Romney Proposes to Drop Top Tax Rate for the Wealthiest Americans from 39.5% to 28%

One of the great surprises that the American people are going to have when or if Republicans (or even Democrats) start cutting the discretionary part of the Federal budget is what that will actually result in.On an unscientific basis, the opinion of this Forum is that most people think the Federal Government employees tens of millions of bureaucrats who sit around and waste taxpayer monies.The truth is the Federal government’s non defense discretionary spending largely consists of transfer payments to state and local governments and to non-profit organizations who do much of the work, and to profit making firms who supply goods and services.

Four cities in Miami-DadeCounty are bearing some of the deepest cuts in the country in federal housing money designated for nonprofit groups that serve the poor, the elderly and the developmentally disabled. Several of the groups’ directors said they had no choice but to turn more poor people away, at a time when services are in greater demand. Layoffs are also likely, they said.

It is not clear why Miami-Dade has been hit hard, but here is the reason why somebody had to be hit hard.

The city has been fighting cuts for the last two years but stepped up its battle in January, when it was told that it would receive even less than it had expected. Congress has cut more than $1 billion from the program during that same time.

Yep, if $1 billion was going to be cut, somebody was going to suffer.Here is a brief picture of that suffering.

“A 34 percent cut — that almost closes our doors,” said Lavern Scott, the executive director of Curley’s House, a food bank based in Miami that serves people in some of the poorest neighborhoods. “We help people who have less than $600 a month in income. How can you pay your rent and eat? How you pay your rent and afford your medication? It hurts us and every other agency.”

And what about children?

“We had 100 children in our day care center 10 years ago,” said Madelyn Rodriguez Llanes, program administrator for a center run by Centro Mater, a nonprofit group that tends to Miami’s poor in Little Havana. “Now we have 50. Soon it will have to drop to 10. The families that we see are people with real needs. They don’t have cars. They have already been cut from other services. They can’t pay for child care.”

The logic behind this is just about incomprehensible.Conservatives want people on welfare and government support to get jobs.To do that they need low cost or free day care.Eliminate low cost and free day care and you make it impossible for those folks to work.

The Obama administration must take a large part of the blame here.It is not clear how much clout they have with a stingy and miserly Congress but surely they have enough to prevent this sort of thing.What are they thinking?

A lot of this is coming because the programs are “block grant” programs, where the Feds just give the states and local government some money and let them decide how it is spent.In this way Congress and the President can say its not their fault if some agencies are decimated.Block grants are a great way to avoid blame, which is why the devastating cuts coming in Medicaid will be implemented by converting it to a block grant program.

And remember Mitt Romney, he’s the guy who says he’s not worried about the very poor, because they are taken care of.Mitt Romney, please beam yourself down from whatever point in outer space you reside and back to Earth.

Small Tax Increase on Low Income Taxpayer; Huge Tax Reduction on the Wealthy – That’s What We’re Talking About

Kansas is now firmly in the control of Conservative Republicans, and Conservative Republicans love nothing more than fiddling around with the tax system.In Kansas they are proposing the tax policy everyone else would call unfair.This is the rationale of their plans

State Republicans have been campaigning to overhaul the tax code in Kansas to spur growth. The idea is that, by eliminating income taxes for residents and small businesses, lowering the sales tax and ditching a host of tax credits, Kansans will have more money and thus stimulate the economy.

So what is the result of such a program as Kansas Republicans see it

A Kansas House tax committee passed a bill in which anyone making less than $25,000 a year — roughly half a million of the state’s 2.9 million residents — will pay an average of $72 more in taxes, while those making more than $250,000 — about 21,000 people — will see a $1,500 cut, according to Kansas Department of Revenue estimates cited by the Kansas City Star.

Well that seems fair, really it does, compared to the policy proposed by the state’s Neanderthal Conservative Governor.

The Kansas House bill, still under review by legislative leadership, is actually a less-ambitious version than one initially proposed by Republican Gov. Sam Brownback in which the poorest would pay $156 more in income taxes while those making $250,000 a year would pay $5,200 less.

Where could such an idiotic and punishing program come from?Kansas employed the most discredited economist in the universe, the aptly named Art Laffer (Laugher)

Reaganomics mastermind Art Laffer is getting paid $75,000 to consult on the state’s overhaul, and he ran into some flak in January when he arrived to give testimony on the new plan, according to the Kansas City Star.

And the state’s Governor has argued that the policy will make Kansas look much more like Texas.

"Our goal is for our economy to look more like Texas, and a lot less like California," Brownback said in a Wall Street Journal editorial praising the anti-income-tax plan.

How much like Texas? Kansas’ unemployment rate is among the lowest in the nation, with 6.3% unemployed, according to the U.S. Bureau of Labor Statistics; Texas’ is 7.8%. The USDA’s Economic Research Service estimatesKansas’ poverty rate to be 13.5%, while Texas’ is 17.9%.

Yep, as soon as Kansas’s unemployment rate increases and poverty rate increases they will declare the program a success.

We also added a hard-to-track down survey from Baydoun Consulting, which gave Mr. Romney an 8-point advantage. However, it is less recent than the others, having been conducted on Thursday night rather than over the weekend.

This Forum has often lauded the analytical abilities of Five Thirty Eight’s premier political analyst Nate Silver, for the simple reason that he is the most accurate forecaster of election results.Mr. Silver uses quantitative models of polling and other data to forecast the percentage a candidate will get and the probability that the candidate will win.

Because the models used by Mr. Silver rely on data as it becomes available, they are not good predictors until just before an election.So now we have the best forecast available for the Republican primaries in Michigan and Arizona, a day before the election.The expectation is that Mr. Romney will win Michigan by about 4 points.

The new polls, from Public Policy Polling and We Ask America, gave Mr. Romney leads of two and four percentage points, respectively, over Rick Santorum. They join two other polls released after Wednesday’s Republican debate, from Mitchell Research and Rasmussen Reports, that gave Mr. Romney leads of two points and six points, respectively.

There is less probability of an election night surprise when the polls are fairly consistent with one another, as they are in this case. That’s why our model makes Mr. Romney a 77 percent favorite to win Michigan even though he has a relatively tenuous 4-point advantage there.

A key factor to look at in Michigan will be turnout.If turnout is down substantially from 2008 this will be an indication of trouble for Mr. Romney in the general election.Most analysts ignore turnout because it is not an interesting subject, but here it is an important one.

In Arizona Mr. Romney has a large lead for a number of reasons.One is that Mr. Santorum has not spent much time in the state.Another is that Mr. Romney’s anti-immigrant image plays well with the anti-immigrant fervor of the Conservative base in that state and now the state’s radically Conservative, anti-Obama Governor has endorsed him.Look for Mr. Romney to win the state, but it may be closer than Mr. Silver’s models, which do not have the benefit of recent polling.

Two Romney wins will set the stage for an interesting Super Tuesday next week.In those contests the geography is more favorable to Mr. Santorum, but Mr. Romney’s momentum with two wins in Arizona and Michigan may offset that.Who knows, which is why they have elections.

Recently the European Central Bank was given a new Chairman, Italian financial expert Mario Draghi.One would have thought that given the problems of the Italian economy Mr. Draghi would be focused on implementing policies designed to improve Europe’s staggering economy.One would be wrong.

Mr. Draghi has taken the position that only austerity, primarily cutting government expenditures, raising the unemployment rate, reducing the middle class to near poverty like conditions and doing little or nothing to stimulate growth is what is needed in Europe.

There are no quick fixes to Europe's problems, he said, adding that expectations that cash-rich China will ride to the rescue were unrealistic. He argued instead that continuing economic shocks would force countries into structural changes in labor markets and other aspects of the economy, to return to long-term prosperity.

There can be no doubt in Mr. Draghi’s mind that he has the right policy

"There is no feasible trade-off" between economic overhauls and fiscal belt-tightening, Mr. Draghi said in the interview, his first since Greece sealed its second bailout.

"Backtracking on fiscal targets would elicit an immediate reaction by the market," pushing interest-rate spreads higher, he said.

Yes you are reading that correctly.“Economic shocks” by which he means recession are the tool that will force Europe to reform and return to prosperity.Of course, Mr. Draghi himself is completely immune to such shocks, having a nice job as head of Europe’s central bank.

Mr. Draghi is concerned about youth unemployment.

﻿

Mr. Draghi, Not Explaining How he
will Alleviate Youth Unemployment in Europe

﻿

He said Europe's vaunted social model—which places a premium on job security and generous safety nets—is "already gone," citing high youth unemployment; in Spain, it tops 50%. He urged overhauls to boost job creation for young people.

Now Mr. Draghi is correct in that labor markets need to be liberalized so that employers can hire workers without fear that they can never ever be terminated, but exactly why any business will hire any workers when business conditions are abysmal is not something people like Mr. Draghi understand.

A former IMF economists has stipped the rhetoric down to its core

"He's just sugar coating the message," said Simon Johnson, former chief economist at the International Monetary Fund.

"A lot of this structural reform talk is illusory at best in the short run…but it's a better story than saying you're going to have a terrible 10 years," he said.

Oh, and the ECB which owns a lot of Greek debt protected itself when Greek debt had to be written down.

In the interview, Mr. Draghi defended the ECB's decision to shield its €50 billion Greek bond portfolio from the steep losses private-sector bondholders face as part of a separate deal between Greece and its creditors to write down €107 billion in debt. He said the ECB "is committed to protect the taxpayers' money."

The person who is President in 2013 is going to face the repercussions of Europe’s policies, which will spill over and weaken the rest of the world’s major economies.Of course, if it is Mitt Romney then he will be adopting those same European policies, so at least the rest of us will know what results to expect.

But It Please One Target Audience, The Editorial Writers of the Wall Street Journal

The old Mitt Romney tax plan the one that is really not that old, in fact the one that isn’t even 6 months old is now largely gone.It’s death was Mr. Romney's need to appeal to the radical economic Conservatives in general and the editorial writers of the Wall Street Journal in particular.As such, with that target audience it really didn’t matter that the plan does not make much sense, because that audience really doesn’t care about what makes sense.

The key element of the plan is the proposal to reduce tax rates by 20% for each bracket.But if this sounds like a hug tax cut for the wealthy, Mr. Romney says no.He says his plan is revenue neutral meaning it will raise just as much revenue as the old system, and that it will be “distributional neutral” meaning income groups will pay the same under the Romney plan as they do under the existing plan.This of course is patently ridiculous.

Mr. Romney will accomplish this alchemy by changing deductions and other provisions of the tax code that will increase taxable income by supposedly an amount that will offset the lower tax rates.Of course, since Mr. Romney has not detailed what these will be or how much or who will be impacted, it is impossible to render an objective measurement of his plan.So he can say it is revenue and distributional neutral and only logic and intelligence can demonstrate that he is wrong, which of course they do.

The plan also brings back what must now be called “zombie economics”, zombie economics being a false idea that just will not die.In this case it is what is called “dynamic scoring”This discredited idea states that the higher growth generated by the lower tax rates will generated enough new revenue to offset some (if not all) of the revenue lost by the lower rates.No serious non-ideological economist believes this, but Conservatives love the concept since it allows them to claim that cutting rates will reduce the deficit.

If the plan were truly revenue neutral, then its only possible benefit would come from the idea that lower marginal rates will stimulate the economy.At some level this is true, but at current levels this is stupid beyond belief.The idea that lower marginal rates will stimulate investment goes against Econ 101, which as everyone knows states that investment is driven by demand.Remember what happened when marginal rates on the wealthy increased during the Clinton administration?The economy boomed.

There is another problem with lower marginal rates.They weaken what Economists called automatic stabilizers.When marginal rates are high, they result in a disproportionate increase in taxes and revenues as the economy recovers.This acts to reduce the deficit and to slow the economy and fight inflation.Similarly, when the economy is slowing taxes are reduced by a greater rate than the slowdown, and this helps the economy have a shorter and less severe recession.

So if Mr. Romney’s plan is implemented the deficit will increase, possibly to the level of $2 trillion and the natural decline in the deficit as the economy increases will not happen.If you need to see details on the Romney plan, look in the economic cookbook under “recipes for fiscal disaster”.

As an election year gimmick, tax proposals are pretty interesting, at least more interesting than most election year gimmicks.This year we have Republicans racing each other to eliminate as much tax revenue as possible, never mind the deficit, Mr. Romney flip flopping on his own plans, and now Mr. Obama proposing corporate tax reform.

The Obama plan is labeled reform rather than reduction because it claims to be revenue neutral.In this way it changes the tax system but does not change the amount of revenue the government collects from the corporate income tax.For this reason alone it is DOA at the Congress, where Republicans would like to reduce the tax burden on “people” (“Corporations are people my friend”).However there are some interesting aspects to the President proposal.

The first thing to note is that the President’s plan lays out the difference between statutory tax rates and actual or effective tax rates.While the U. S. has high statutory rates, it doesn’t really matter because a lot of corporations don’t pay those rates.The effective rate, what the corporations really pay is just about equal to the average of major economies. As everyone can see, that argument about the U. S. having the highest rate is just not true, not that this fact will stop politicians from claiming it to be true.

TABLE 1: 2011 G-7 STATUTORY CORPORATE TAX RATES (IN PERCENT) Country

Statutory Corporate Tax Rate
(including subnational taxes)

Effective Marginal Tax Rate
(including subnational taxes)b

Canada

27.6

33.0

France

34.4

28.3

Germany

30.2

23.3

Italy

31.3

24.0

Japan

39.5

42.9

United Kingdom

26.0

32.3

United States

39.2

29.2

G-7 average excluding the U.S.a

32.3

31.9

a. The G-7 Average is calculated using 2010 gross domestic product (in current US dollars) as weights. Source: OECD.

b. See Table A1 in Appendix I for an explanation of the methodology for calculating the effective marginal tax rate.

However, even as the United States has among the highest statutory corporate tax rates, the effective marginal tax rate on corporate investment in the United States is similar to that in other competitor countries (see Table 1). The effective marginal rate represents what businesses would actually expect to pay on a marginal investment. The discrepancy between where the United States ranks in terms of the statutory rate and in terms of the effective marginal rate comes about for a number of reasons.

So what else is in the proposal that is of interest?Well there is some silly stuff, like changing the way corporate aircraft are treated for tax purposes, some serious stuff like making wealthy buy-out fund managers pay income tax on their income and some strange stuff.What is an example of some strange stuff?Well the program would change accelerated depreciation which allows for investment to have a shorter depreciation life than its physical life.

In an increasingly global economy, accelerated depreciation may be a less effective way to increase investment and job creation than reinvesting the savings from moving towards economic depreciation into reducing tax rates

This is strange because the President just finished implementing a policy that allowed for immediate write off of investment, the greatest accelerated depreciation there can be.

There is some really good stuff in here, like requiring corporations to pay a minimum tax on their foreign earnings, eliminating tax deductions for moving production offshore, and giving a tax credit for moving production from off shore to the United States.All good proposals that will fail to gain Republican support, probably because they are good proposals and one thing Republicans do not want is to ever do what’s good for the country if it means giving the President an accomplishment.

Sunday, February 26, 2012

An Advice Column for the Perplexed and Confused on Economic and Political Issues

[Editor’s Note:In his continuing effort to bring light and clarification to current events and current issues, The Dismal Political Economist is now answering reader’s questions on how the current political and economic climate affects them personally.]

Dear Dismal Political Economist

I have just recently converted to the Republican party but I am unsure about some of the principles that we have.For example, for several years the party has said they are against “mandates” with respect to health care.I am also against mandates but I don’t understand why they are now in favor of mandates.

For example, they would mandate that a woman seeking an abortion have an ultrasound even if the procedure is not approved, recommended or suggested by her physician.They would also mandate that the patient be given certain information by the doctor.And in Virginia they want to mandate what goes into a person’s medical records. In fact it looks like they want to mandate a lot of aspects of a person’s medical care.

Can you explain to me how Republicans are against mandates when they seem in favor of all these mandates?

Signed

Confused in Carolina

Dear Confused

There are several aspects of the Republican opposition to mandates.One part of their opposition is that they are opposed to men having mandates, because that is gay stuff.They believe it is okay for women to have mandates as long as it doesn’t involve contraception.

But as far as mandates for health care is concerned, Republicans are only against mandates that Democrats are for.In fact, they believe that the government knows far better what should go on in a doctor’s office than the doctor or the patient.This is particularly true with respect to women, who according to many Republicans are just too emotional and weak to make their own health care decisions.So what you may call a mandate is for them just the natural result of protecting women, something they believe that a kind and compassionate government should do.

As a newcomer to Republican politics you should expect to be confused by these contradictory positions.Don’t worry, after a while you won’t even notice the inconsistencies in policy recommendations from the GOP, in fact you will come to find that it is one of the endearing qualities of that party.